Be Safe Get to Know Your COP Dr. Gary G. Frank Agricultural Economist University of Wisconsin/Madison - Emeritus

Introduction l The cost of production (COP) is the costs associated with production divided by the number of units produced. l What is difficult about that? l Single versus joint product enterprises l A joint product enterprise in one in which two or more products are produced from one production process

Introduction (cont) l Is there a difference between price per unit and income per unit? l We will look at 3 methods for calculating the cost of producing milk. l But first we will give you an opportunity to do the calculation your way.

Text Problem l Milk Income per cow= $3,520 (22,000 pounds) l Other Dairy Income per cow= $480 l Milk Price is $16.00 per hundredweight l Purchased Feed$800 per cow l Paid Labor$300 per cow l Interest Paid$200 per cow l Other$1340 per cow l Total Operating Costs$2,640 per cow l Unpaid Labor and Management$400 per cow l Depreciation$300 per cow l Interest on Equity Capital$400 per cow l Total Overhead Costs $1,100 per cow l Total Costs$3, per cow

Questions on Text Problem l What is the feed cost per hundredweight of milk? l What is the total cost of production per hundredweight of milk? l What is the profit per cow? l What is the return to unpaid labor, management and equity capital per cow?

Methods – Per Unit Sold l Feed per 100 lbs = $3.64 ($800 / 220) l Total cost = $17.00 ($3,740 / 220) l Income per 100 lbs sold = $ l $18.18 income/unit - $17.00 cost = $1.18 profit per unit l $1.18 times 220 = $260 profit per cow l $260 profit + $400 unpaid + $400 = Return to Unpaid L&M and equity

Method: Residual Claimant l Income from the sale of the joint product(s) is subtracted from the total cost l $3,740 cost - $480 of other income = $3,260 of residual costs l Feed Costs per unit = ??? l Total Cost: $3,260 / 220 = $14.82 l Profit per cow: ($ $14.82) * 220 = $260 l Return to Unpaid L&M + equity = $1,060

Method: Per Equivalent Unit l Total Enterprise Income (from all products) Price of Major Product l $3,520 + $480 = $4,000 Total Income l $4,000 / $16.00 = 250 equivalent units l Feed cost = $3.20 ($800 / 250) l Total cost = $14.96 ($3,740 / 250) l Profit = $260 (($ $14.96) X 250). l Return to Unpaid L&M + equity still $1,060

Comparisons l Units Sold: –Total cost = $17.00 ($3,740 / 220) l Residual Claimant: –Total Cost = $14.82 ($3,260 / 220) l Equivalent Unit: –Total cost = $14.96 ($3,740 / 250)

Conclusions l When individuals see a cost of production value they immediately compare it to the price of the product. l The “Equivalent Production” method is the best for joint product enterprises l Remember if an enterprise has only one product, all methods produce identical results.

Problem 1: 110 cows Problem 1: 110 cows l Milk Income = $387,200 (22,000 pounds / 100 X $16.00 X 110) l Other Schedule F Income= $52,800 l Cull Cow Income from Form 4797= $13,750 l Increase in Dairy Herd Inventory= $16,500 l Purchased Feed= $88,000 l Paid Labor= $33,000 l Interest Paid= $22,000 l Other= $147,400 l Unpaid L & M= $44,000 l Depreciation= $33,000 l Interest on Equity Capital= $44,000

Answers – Problem 1 l Units Sold: –Total cost = $17.00 ($411,400 / 24,200) –Versus $19.43 –($4720,250 / 24,200) l Residual Claimant: –Total Cost = $13.57 ($328,350 / 24,200) l Equivalent Unit: –Total cost = $14.00 ($411,400 / 29,391)

Problem 2: 250 cows l Milk Income= $880,000 (22,000 pounds / 100 X $16.00 X 250) l Other Schedule F Income= $25,000 l Cull Cow Income from Form 4797= $37,500 l Purchased Feed= $225,000 l Paid Labor= $125,000 l Interest Paid= $75,000 l Other= $425,000 l Unpaid Labor and Management= $100,000 l Depreciation= $87,500 l Interest on Equity Capital= $100,000 l BeginningEnding l Feed Inventory$300,000$287,500 l Dairy Cattle Inventory$525,000$550,000 l Accounts Payable$25,000 $0 l Prepaid Expenses$20,000 $70,000

Answers – Problem 2 l Units Sold: –Total cost = $19.32 ($1,062,500 / 55,000) –Versus $17.36 –($955,000 / 55,000) l Residual Claimant: –Total Cost = $17.95 ($987,500 / 55,000) l Equivalent Unit: –Total cost = $17.80 ($1,062,500 / 59,687.5)

Thoughts - Comments Thank You for your attention.